Are we going to witness an historical housing price correction amid sharpest rise in unemployment and social tension?...and the minimum you should know in order to protect yourself from this downturn from an economic, stock market and political point of view... with a pinch of humor and sarcasm.

Sunday, 10 January 2010

Deflation, How Would IT Happen?

"Unemployed for nearly a year, David Becker was relieved to land a new job in information technology last summer.

The offer carried a price, though: It was a lower-rung job than the one Becker had lost. He had to uproot his family from Wisconsin to Nevada. And, like many formerly jobless people who find work these days, Becker is now paid far less than before — $25,000 less.

It's one of the bleak realities of the economic recovery: Even as more employers are starting to hire, the new jobs typically pay less than the ones that were lost.

In the government's data, a job is a job. More jobs point to a growing economy. But to people who used to earn $60,000, a new $40,000 job means they'll spend less — and contribute less to the recovery."

Simply...by reshuffling the workforce following a period that will be remembered as credit excesses in almost all sectors.

Now one has to take that into account when purchasing an asset that will have to be served for 20-30 years i.e in the shorter term (at least 2-5 years) do not count on inflation to ease the burden of debt quite on the contrary...deflation will probably hold for the foreseable future making debt a real burden.

I still think the worse is still ahead ;->... since so far people are still reacting as if we are have had a bad time and now we are back to business as usual i.e people over consuming, housing price rising faster than income, personal debt rising to absurd levels, stock market resuming its "bubble" mode etc...

So far there is no evidence that this growth is based on real fundamentals but is the only result of various stimulus that in nature temporary.

I fear the scenario where a heavily heroin-addicted guy is continuously waiting for the regular supply of heroin doses. If you don't give him the doses, the guy will get a fatal heart-attack immediately. If you give the doses, the guy will die in a few years. So, you may have to give the doses anyway.

Has the society gone this way? I am not fully sure yet. Though, it seems to be approaching it quickly.

I agree that the current model which consist into pushing people to take more and more debt (growth velocity of their income is much lower to the assets they try to acquire) while salaries are not rising or very little (when adjusted to inflation) or even dropping (furlough, bonuses etc..)... well that system/model has just broke sometime in 2008.

I think people have not yet understood that..it will take a bit time and politicians get to make the transition as smooth as possible...

We observe as well that the private sector cannot take any more debt - the burden is too heavy, so the solution so far, in the past year, has been to shift it to the public sector (governments) which is accumulating debts at record speed (see Finland debt to GDP growth in the past 10 months, see Greece, See Spain , see Ireland etc.. etc.. )... so here we have reached the tipping point.

I suppose it is important to delay the deleveraging, in order to save the essential of the financial system , give more time to solid company to strenghen their capital base...as we have see in late 2008 there were all taken by surprise, if it was not the intervention of central banks and government , the system would have collapse (one would ask why did they let it become the way it had...political? strategic? or simply a total misunderstanding of the situation that were captured that inefficient models)...

Nevertheless we are still in that turbulent period for at least 2-3 years...and hope it will be that short ;-> (see Japan...)